Last Monday (February 20th), I started a new, different kind of bull stock market, “A New, Interesting Bull Stock Market Is Emerging.” Such a shift occurs when a significant selloff stops a previously popular market rally. So, what steps should be taken to take advantage of this?
- First, reject past views, reasoning, expectations, and actions. The media is still closing in on these issues, but that’s just mental inertia. The former construction has been canceled and will not be seen again. It takes time for the media and most investors to recognize that a new movement is underway.
- Second, accept that the next bull run will be unique, and it means something completely different. That doesn’t mean the next move will be a simple 180-degree reversal—say, value stocks instead of growth.
- Third, realize that media reports are not going to help in determining what is coming. Also, don’t expect those “so-and-so is now buying XYZ” articles to help. They only happen after the fact.
- Fourth, know that most professional fund managers do not try to predict stock market movements. Instead, they will continue to find attractive stocks within their investment approach (called their “investment style”). They understand that their style will vary in popularity during different market cycles, but with good stock selection, they can beat the market in the long run.
The next step is to try to identify a new trend
There are many stock portfolio management tactics, from passively managed index funds to actively managed funds, choosing an investment advisor, and picking your own stocks.
What makes it difficult to catch the new stock market wave is that the drivers are not clear. This, in turn, makes the characteristics of the future unknown.
It’s important to understand that it’s not just individual investors who are in the dark. So are professionals. Therefore, the latter stick to their investment style.
What happens in the stock market is that certain companies start to gain an advantage because of their advantages. As more companies are added to the favorites list, similarities become apparent and trend drivers emerge. By then, of course, the shares of those companies have already risen nicely.
A way forward
Because stock trading is “transparent” (that is, visible to the public throughout the trading day), early signs (called “technical indicators”) of a preferred stock are that it is superior due to increased trading volume. This relationship is certainly well known and widely used in bull markets – “relative strength” and “momentum” investments are common labels.
However, when stocks decline significantly, investors start to lose interest in technical indicators. When the market sells off, as it is now, the interest is negligible. In fact, many investors lost interest in speculation as the stock market pulled out – the “shakedown” I discussed earlier (November 21 – “Stock and Bond Investors: Markets Are Heading for Shakeouts – Raise Cash“).
Therefore, when these first, professionally selected stocks start to show positive signs, few investors notice them. Moreover, it will take some time for investor-speculators to take effect.
However, there’s a problem: There are always “false” stock moves—that is, rising trading volume that doesn’t come from accumulating professional investors. Three examples are a good earnings report beat, an industry wide drop, and a day trader buying. False moves have one obvious characteristic: Weak trailing figures – That is, a decrease in volume with little or no price increase.
Then there’s this helpful step…
Narrow down your search to all-time high stocks
Stocks trading at all-time highs have two very important characteristics:
- Investors are willing to buy at a high pricethat is, they see reasons why the company and its stock will perform well in the future
- All shareholders benefitconfirms that the reasons for the purchase are correct
I understand that looking at all-time high stock charts and technical indicators can seem overwhelming. However, it has worked for me since I started investing in 1964. It’s not my only strategy, but it has provided me with key information as of now, especially at market bottoms.
Conclusion: Now seems like the right time to act
The current market environment is particularly suitable for this approach. Based on the initial stocks selected, the new bull market will likely focus on individual stocks of smaller companies that are not household names and are not included in the S&P 500.
In other words, there is increased interest in companies that are more focused, less burdensome, more flexible and have the potential for higher growth rates. Also, increased interest from small investors can move the company’s stock significantly.